Russia Business Overview

Economic Overview

Russia’s main industries include mining and extractive industries producing coal, oil, gas, chemicals, and metals; machine building, including high-performance aircraft and space vehicles; defence industries, including radar, missile production and the production of advanced electronic components; shipbuilding; agricultural machinery; medical and scientific equipment; electric power generating equipment; and textiles and clothing.[1]

Prior to the Ukraine invasion, Russia was one of the world’s leading producers of natural oil and gas and was a top exporter of metals such as steel and aluminium.[2] Indeed, Russia’s crude oil production was forecast at 10.3 million barrels daily[3] and it relies heavily on oil and gas related taxes and export tariffs.[4] However, after the invasion, the expected production volume was lowered to 8.8 million barrels per day and this is expected to decrease every year until 2030.[5]

However, in spite of these figures and despite the sanctions placed on Russia following Putin’s invasion of Ukraine in 2022, Russia’s economy has seemingly avoided the collapse that many predicted. This is as a result of high global energy prices which have cushioned the impact of the sanctions. Indeed, recent data shows that Russia has the world’s ninth-largest economy by nominal GDP.[6] Putin has also ordered a 10% rise in pensions and minimum wage in order to reduce the impact of the sanctions on Russian citizens. Major employers such as Sberbank and Gazprom have also raised employee salaries to help cope with rising prices.[7] Emergency capital controls have reportedly helped the economy massively and Russia’s consumer confidence index also reached over 97 in August 2022, which marked an increase from the previous months.[8] Russian revenue has also remained high due to increased prices for oil and gas felt globally as well as continued demand from India and China.[9]

That said, it is unclear as to how long this stability will last.[10] Indeed, there have been reports of Russian citizens struggling to pay for basic goods in supermarkets.[11] Furthermore, official figures show that consumer prices have risen to 10.7% at the time of writing, which is compared with a 4.7% rise over the same period in 2021.[12] Furthermore, the Russian government, in light of the sanctions, has halted publication of a raft of economic data since April 2022, which means that a lot of the data relied upon involves an element of speculation.[13] However, economists are suggesting that despite any current stability in the Russian economy, the sanctions will have long-term effect.[14]

Business Overview

With regards to business, since the Ukraine invasion, thousands of businesses have ceased operations in Russia in an effort to strike at Russia’s economy.[15] Pressure will remain high for other Western companies to do the same for the foreseeable future.[16] This is strengthened by the issuing of Decree 299 by the Kremlin, which forces patent holders to grant compulsory licences to Russian companies and individuals if the patent originates from a list of specific countries (mostly G7).[17] This will undoubtedly deter patent holders from doing business in Russia.

Even prior to the Ukraine war, there were considerable risks in doing business in Russia. These include a lack of transparency and rule of law and ineffective local authorities and government agencies.[18] Protection of property rights is also weak, and the state continues to interfere in the free operation of the private sector.[19] There are also issues with the enforcement of contracts. Indeed, contracts tend to be valid only if supported by a close personal friendship.[20]

Russia (Sanctions) (EU Exit) Regulations 2019 Overview[21]

The Russia (Sanctions) (EU Exit) Regulations 2019 came into force on the 31^{st of} December 2020 which are intended to ensure that sanctions relating to Russia operate effectively. The sanctions are aimed at encouraging Russia to cease actions destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine.

The prohibitions and requirements imposed by the Regulations apply within the United Kingdom (UK) and in relation to UK persons and UK company branches overseas.

The Regulations impose various financial, trade, aircraft, shipping, and immigration sanctions. They also impose a number of prohibitions, requirements, and establish penalties and offences in order to enforce the regulations. The trade prohibitions relate to a number of goods, including: military goods and military technology; luxury goods, including gold and gold jewellery;[22] aviation goods,[23] including jet fuel and fuel additives;[24] maritime goods; oil refining goods; iron and steel products;[25] and goods which generate significant revenues for Russia.[26]

The Regulations also impose financial sanctions through a targeted asset freeze on designated persons and prohibitions on making funds or economic resources available. These designated persons include the so-called oligarchs (wealthy business leaders thought to be close to the Kremlin).[27] The Regulations also prohibit granting a new loan or credit arrangement to a relevant entity or the Government of Russia for the purposes of making an investment in relation to Russia.

There are a number of export prohibitions, which prohibit the export of certain goods to Russia as well as exports that are for use in Russia. This means that, even if the immediate destination is not Russia, the prohibition may still apply. A number of import prohibitions also cover goods that are consigned from Russia and goods that originated in Russia. Again, this means that even if the immediate place the goods were shipped from was not Russia, the prohibition may still apply.

Certain other services are prohibited in the Regulations. These include the provision of services which enable or facilitate military activities, insurance and reinsurance services, energy-related services, infrastructure-related services, tourism-related services, internet services, other professional and business services.

Licensing and exception provisions are contained in Part 7 of the Regulations. Exceptions apply automatically, and do not require a licence to be issued in accordance with the Regulations.

The UK has also excluded major Russian banks from the UK financial system, frozen the assets of all Russian banks, barred Russian firms from borrowing money and has placed limits on deposits that Russian citizens can make at UK banks in an effort to limit Russia’s access to money.[28]